EU Legal Opinion Says Financial Transaction Tax Illegal

By Editorial 13 September, 2013

European Union lawyers have warned that a Financial Transaction Tax within parts of the EU would illegally exceed member states' jurisdiction for taxation and create distortions to the detriment of non-participating EU member states. According to an internal document from the lawyers, which offers non-binding advice, the tax "infringes upon the taxing competences of non-participating member states," and is therefore incompatible with the EU treaty.

Eleven countries hope to create an "FTT Zone" under provisions for "enhanced cooperation" between EU states. In cases where an institution inside the zone enters into a transaction with an institution outside, the institution inside is responsible for paying the total amount.

However, the document warns that imposing "deemed residency" on financial institutions in non-participating states amounts to the exercise of jurisdiction over entities outside the zone, in contravention of customary international law, and that the proposals therefore go beyond what is allowable under enhanced cooperation. Further, in cases where a financial institution engaged in a transaction is not established within the zone, that institution's jurisdiction has a stronger claim to impose a tax on the transaction.

The lawyers explain that a concern that the FTT would prompt institutions to migrate transactions outside the zone would not justify extraterritorial tax legislation, and that anti-fraud or anti-evasion measures would not be justified under the principle of proportionality.

The opinion also suggests that the different treatment of cross-border transactions within and outside the zone would be discriminatory. Also, a clause allowing a party to avoid being regarded as resident by showing that there was no economic link between a transaction and the state in which the party resides would risk disparity of application and litigation, as it would be "quite impossible" for member states to define when this would apply.

A spokesperson for EU Tax Commissioner Algirdas Šemeta rejected the opinion, saying that the FTT had been subjected to a thorough legal analysis, that EU member states should assess the document critically. Germany's Finance Ministry has also reasserted its commitment to the FTT.

In the UK, Simon Leach, a financial services tax partner at PwC, observed that the opinion was "likely to provide the Participating Member States with pause for thought ahead of negotiations which are due to restart at the end of September. He added: "The road toward a scaling back of the scope of the tax, perhaps towards a more traditional stamp style regime, now seems to be cleared."

The document echoes concerns that have already been raised by the UK. Prime Minister David Cameron has described the plan as "madness," and in April the House of Lords European Union Committee noted that the tax would apply to UK financial institutions when dealing with countries that have the FTT, and that there was a lack of detail about how the tax would be collected and how it would affect subsidiaries outside the FTT zone. The Committee urged Chancellor George Osborne to take "urgent legal advice" on the issue, and the UK Government subsequently launched a legal challenge in Europe on the deadline for doing so.

The FTT proposal was also recently attacked by the London Chamber of Commerce and Industry as potentially "particularly damaging" for London's financial services industry and for businesses supporting the financial sector, while the British Bankers' Association (BBA) warned that the European Commission had "seriously underestimated the cascading effect" of the tax. The BBA also raised the prospect of "broader threats to monetary policy, financial stability and the wider economic interests of the EU."

In July, however, the UK's Business, Innovation and Skills Committee asked the Government to consider the "viability, benefits and risks" of an FTT on High Frequency Trading. The Committee had heard evidence that the tax would promote long-term investment and stability by removing "unnecessary trading" from the financial system, but that finding a workable structure would be "very difficult."

Tags: Tax | European Commission | Government Committee | Financial Services | Tobin Tax | Legislation | European Union (EU) | Services | Expats | Europe |


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